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HHS USE OF MEDICARE DRUG FORMULARY DEPENDS ON BOTTOM LINE: WOULD COST SAVINGS BE ENOUGH TO OVERCOME POLITICAL/ADMINISTRATIVE PROBLEMS

Executive Summary

HHS would establish a Medicare drug reimbursement formulary if it makes the bottom line conclusion that the program cost savings with a formulary would outweigh the political and administrative problems. Department policy planning staffer Walton Francis indicated in July 20 testimony to the Senate Special Committee on Aging that HHS is looking at a formulary in anticipation of expansion of Medicare benefits to cover outpatient drugs. "Foremost among the problems of designing and implementing a Medicare drug benefit is determining which drugs are to be paid for and how much one should pay for their coverage," Francis pointed out. "A difficult choice would need to be made between covering all drugs . . . and establishing a Federally prescribed formulary." While a formulary "may seem desirable in terms of limiting the benefit to cost-effective drug products, the administrative process and political controversy entailed in distinguishing among these products could outweigh any benefit savings," Francis said. However, program costs exert pressure toward a formulary, he said. Without a formulary, "any prescribed drug approved by the Food and Drug Administration such as antibiotics and cough medicine would be covered under Medicare, including drugs used only episodically for short-term illnesses," Francis noted. He also pointed out that a formulary would discourage beneficiaries from substituting covered Rx drugs for corresponding OTCs. Francis pointed out that federal price-setting by the Health Care Financing Administration (HCFA) could also be considered a necessary cost control mechanism. "You should be aware that, ultimately, the result could be to move Medicare in the direction of administered-pricing," he said. "HCFA would have to do extensive surveying, data gathering, and auditing to assure our beneficiaries, who would be paying for this coverage, that they are getting the best possible deal" (emphasis in testimony). Committee Chairman Melcher (D-Mon.) told Francis that despite opposition from the Administration, the Senate is ready to join the House in adding a prescription drug benefit to Medicare. He began, "I believe that it's fair to say that while the department [HHS] may not be ready to add on the high costs of prescription drugs, I believe Congress is ready. And the reason Congress is ready is because of the literally millions of constituents who have told us . . . that this is really what's bugging them the most. "They're shocked to learn that when they get into their retirement years, what they thought might be covered or assisted by Medicare, just doesn't apply at all," Melcher continued. "And so it's a question of the people saying, 'you don't have the right kind of program for us,' and we in Congress are beginning to respond to that. I think we've had a lot of studies and I don't fault the department for the statements you've made. But people are ready; they want it. And it's up to us here in Congress to find out how we present it, how we assist, and how we pay for it." Francis also presented HHS' view of the administrative difficulties anticipated in handling drug claims. Processing the many claims expected would demand the establishment of a "complex and costly" system, Francis asserted. "Depending on its design, Medicare may have to process as many as 300 million claims per year and monitor about 67,000 pharmacies," he said. Francis discussed the problems presented by one system, where Medicare would work with participating pharmacies. He pointed out that the concept of "participating pharmacies" is likely to entail a high administrative "allowance" for pharmacies due to the expenses they would incur. Pharmacists may be willing, initially, to accept the suggested allowance of $4.50, Francis said. "However, given their increased record-keeping burden, they might soon expect to receive a higher amount, especially if payment for product costs are tightened." Nevertheless, Francis predicted that a system in which Medicare alone handled claims is likely to lead to "noticeable" beneficiary dissatisfaction. "Medicare would then have to process hundreds of millions of additional claims, most of which would not be eligible for payment," Francis predicted. "In addition, based on our experience, we would expect that many of the claims would be submitted with incomplete information." A General Accounting Office report on Medicare drug coverage, released at the hearing, also addressed escalating costs, advising that cost precautions be taken "from the start" to avoid the need for adjustments once the program is underway. The report outlined the experiences within two state programs as examples. In order to restrain sharply rising costs, GAO said, the New Jersey program has had to increase copayments from $1 to $2, add a provision for prescribing generic drugs, set a maximum allowable cost provision and tighten residency requirements. By 1986, the cost of New Jersey's program had nearly tripled (to $96 mil.) since 1978, when it was $35 mil., the report said. Costs in the Pennsylvania program tripled in its first three years, according to GAO. Income-based limitations to the benefit are favored by the American Medical Association as the way to control costs, AMA board member Raymond Scalettar told the committee. "We believe strongly that the program should be means-related," Scalettar declared in a presentation of AMA-recommended "principles" for inclusion in a program for outpatient drug coverage. An income-related program would assure that the neediest elderly are not denied benefits in order to maintain equal costs among all beneficiaries, Scalettar maintained. "Relating a premium, deductible or coinsurance to the beneficiary's financial resources would guarantee that those elderly who can afford to pay more for a drug benefit would do so," he said. "This would ensure that the program is within reach of lower income beneficiaries." Consideration should be given to exempting beneficiaries with income below a certain level, Scalettar recommended. AMA is against the use of a formulary or other means of limiting the range of drugs covered, Scalettar asserted. "The AMA vigorously opposes the establishment of a national or state drug formulary or other mechanism to restrict drug availability," he stated. "Restricting the availability of certain drugs would have a detrimental effect on patient care."
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